MAJOR MACRO ECONOMIC INDICATORS

(f): forecast * balance of the non financial public sector ** excluding PDVSA debt

RISK ASSESSMENT

Recession and hyperinflation in an atmosphere of political and social tensions

After declining in 2013, growth will be replaced by recession in 2014. Despite the scale of social support and the price limits imposed on a number of consumer and durable goods, the relentless slowdown in private consumption will continue. With the ending of the election period, public expenditure will be cut back. The fall in investments by private companies will continue. The worsening political and social situation will not encourage households to spend, or companies, whether local or foreign, to invest. Inflation will remain at a very high level. This is being stoked by a shortage of certain goods (cars, health and hygiene products and basic foodstuffs) resulting from the inadequacies of the agricultural and industrial sectors and the difficulty in obtaining foreign currency for imports, as well as from the monetary financing of the public deficit.

High budget deficit funded by the creation of money

The budget deficit will remain significant, leading to a further rise in debt. Even though the majority of the deficit is being financed by the creation of money by the Central Bank, the rest is being borrowed from local banks. These are, moreover, required to lend to certain sectors, to allocate 5% of their profits to social programmes and to apply the interest rates as set by the government. Public expenditure, which includes the subsidies, most notably on fuel prices, accounting for one-third, will remain high. Against these expenses, income, one-third of which comes from the operating earnings of the national oil operator PDVSA, falls well short. In addition, the funding by PDVSA of certain public expenditure, mainly of a social nature, works to hide the true reality of public finances. To get a better idea of the level of public debt, part of the debt held by PDVSA also needs to be included in this. The use of the resources of PDVSA, without which no new extraction project can start, is detrimental to its investments and future oil production, on which relies a quarter of the economy.

Declining current account surplus that can no longer cover capital outflows

The current account surplus is in steep decline. Oil exports (90% of all exports) are declining as a result of increased domestic consumption and the slow falling-off in production. Against this, the controls on foreign exchange and trade flows are not preventing the enormous scale of imports of consumer goods and durables, as well as of refined oil products, a direct consequence of the pitiful state of the non-oil sector and the lack of refining capacity. Payments to foreign service providers, both for extraction and shipment, are expensive. Any increase in oil production in the Orinoco Belt and the development of offshore gas fields in cooperation withTrinidadwill require even greater use of foreign partners. Whilst new foreign direct investments are much reduced, foreign involvement in the oil and gas partnership companies implies the repatriation of profits. Lastly, despite the strict currency controls, there is a large-scale leaking of capital facilitated by the extent of corruption and encouraged by the financial repression and expectations of inflation. The bond issues by PDVSA on the international market and recourse to bilateral loans (China,Russia) are not enough to achieve the balance of payments, such that the country has to use its reserves which are now much reduced. The fall in the price of gold, which forms the main part, has also had an impact.

Very difficult business environment

The April 2013 Presidential election was won by a narrow margin by Nicolas Maduro, the PSUV (Partido Socialista Unido de Venezuela) candidate and former Vice-President to the late Hugo Chavez. However, at the beginning of 2014 there were demonstrations by students in the west of the country against the high level of crime. The hard repression of these, resulting in a number of deaths and a large number of arrests, lead to radicalisation and the spread of the movement to other regions and other groups of the population also dissatisfied with the shortages, corruption, nepotism, patronage and control being exerted by the government over the media. Part of the political opposition is supporting the movement. The authorities are counting on the support of its popular electoral base, who have benefited from the reduction in extreme poverty, improvements in health and hygiene, and increased employment in the public sector, as part of the “Bolivarian revolution”. The outcome of the protest movement is uncertain given that the opposition is not united and that dissensions could appear among the supporters of the President, who lacks the charisma of his predecessor. The uncertainty will continue until at the earliest the legislatives elections in September 2015, and especially for companies. The threat of nationalisation, the rationing of imports and the controls on prices and margins, with the intervention of the army inside stores, remain current issues. Suppliers, both foreign and local, to the State and the oil sector are reporting significant delays in payment. Importers are finding it extremely difficult to get hold of currency to pay their suppliers, even though they have had to obtain prior permission to import. Locally based foreign-owned companies are experiencing the same problems when it comes to repatriating their profits. With hyperinflation, currency controls and the flow away from the bolivar, there is an enormous gap between the official exchange rate, totally anomalous despite the occasional devaluations, and that offered on the parallel market. The essential goods that can be imported at the official rate are then subject to intense racketeering that increases the shortages.